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    Southeast Asia
     Nov 17, 2012


SPEAKING FREELY
Manufacturing a future for Myanmar's people
By George Gorman

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

Myanmar's rapprochement with the West presents a rare opportunity to untangle a web of unfeasible sanctions, rein in the business oligarchy and harness the progressive elements within Myanmar's economy to help alleviate the poverty suffered by millions of Myanmar citizens.

As the result of decades of military rule, prominent industries in Myanmar have been integrated into the economic portfolios of oligarchs. The newly enacted Foreign Investment Law does not challenge this fact, with provisions placing restrictions on foreign

 

investment in 11 "sensitive" sectors cartelized by the business elites within the country.

Thus, the question arises: what alternative is available to reformists and foreign investors eager to liberalize the economy?

Manufacturing presents a clear alternative to long-held prioritization of extractive and service industries and to sectors monopolized by business elites and can be a powerful driver of economic growth in the long term. Importantly, foreign investors can play a pivotal role in transforming Myanmar's low-skilled workforce into a skilled workforce. Nor is manufacturing likely to confront restrictions and presents an opportunity for investors to assert themselves.

In comparison to service, extractive and agricultural industries, manufacturing has greater potential for creating high-quality jobs. As businesses meet larger economies of scale and integrate into regional and global supply chains, urban areas generate more employment opportunities for locals. Consequently, mid- to high-level production demands can accelerate wage appreciation, mitigate wage inequality seen in other sectors, and encourage the transfer of technology and international know-how to sustain long-term local operations.

Myanmar is in a prime position to follow the Initial success of neighboring members of the Association of Southeast Asian Nations, notably Indonesia, Thailand and Vietnam, that have utilized manufacturing-led growth to propel them to middle-income countries (MICs).

In 2011, the agriculture and manufacturing sectors in Myanmar received a meager 1% of total foreign direct investments (FDI), and of this amount, manufacturing only accounted for 0.3%. In contrast, extractive resources monopolized over 90% of FDI.

If Western foreign investors choose to allocate the majority of their FDI toward extractive resource and hydroelectric industries, as Myanmar's Asian partners have done, then they must abide by the entrenched elite's terms with regard to the timber, oil, gas, minerals, construction, power and transport sectors. The provisions for investment in "sensitive sectors" under the new Myanmar Investment Law ensures that the position of longstanding elites will not be compromised in the new economy.

Undoubtedly, daunting obstacles confront foreign investors looking to jump-start Myanmar's crippled manufacturing industry. Accusations by the International Labor Organization in 1997 of forced labor prompted the removal of Myanmar from the World Trade Organization's Generalized System of Preference, which gives export goods from "least-developed countries" access to developed markets at a lower tax rate.

Additionally, the imprisonment of Aung San Suu Kyi in 2003 spurred the West to levy sanctions on imports from Myanmar that forced the closure of hundreds of factories and left 100,000 garment workers out of work in an industry valued at over US$800 million. Notably, from 1999 through 2003, the garment industry composed the largest percentage of the export sector at 30% and was a vital engine of economic growth within the civil society.

Advocates for the garment industry, such as members of the Myanmar Garment Manufacturers Association, have been concerned that low wages (based on 10% to 15% of an item's total value), compounded with poor working conditions, will force personnel to worker longer hours for less. Already suffering from a shortage of skilled workers, Myanmar's alarmingly high turnover rate has not abated and has bolstered competing industries in neighboring Thailand and China that offer better wages and working conditions.

Consequentially, it falls on the Myanmar government to collaborate with new foreign partners and local business people to create amenable working conditions, establish social safety nets and unions, and provide competitive pay scales for workers ahead of the formation of the ASEAN Community in 2015.

Without visible improvements in wage appreciation and in the human development index of the Myanmar workforce, ASEAN's eased migration policies for skilled labor could increase the exodus from Myanmar.

Myanmar has the opportunity to act now and avoid the economic malaise and brain drain that has plagued the manufacturing industry in the Philippines, where over 11% of the Filipino citizenry, the bulk of the skilled working class, have emigrated overseas to find better jobs.

The first mechanism in jump-starting the manufacturing industry is the formation of the Myanmar Investment Commission (MIC). This government-appointed body under the Ministry of National Planning and Economic Development is staffed by 20 government officials with pending staff increases of 30-50 officials in coming months.

Charged with a steep learning curve, these officials must meet the influx of interest in Myanmar's economy, determine investment ratios and deliver accountability for FDI inflows. Notwithstanding concerns over the potential for rent-seeking behavior and inefficiencies within the MIC, this institution is in a leading position to build confidence and trust with foreigner investors looking to navigate Myanmar's nascent regulatory and export regime.

Critically, the MIC can serve as a catalyst in revitalizing the ailing manufacturing sector by easing bureaucratic red-tape and pushing to lessen labor market restrictions that impede a company's ability to hire new workers.

Second, outside a generous tax holiday of five years, and pending approval by the MIC, 100% foreign ownership being offered to new foreign enterprises, the Myanmar government should substantially lower the corporate tax rate to compete with ASEAN countries and undercut Thailand's alluring 20% corporate tax rate in 2013. Myanmar should focus on higher volume of investment in order to spur the manufacturing industry and generate higher revenue for the state in the long run.

Third, supporting manufacturing and production efficiency requires a transfer of knowledge. Myanmar cannot build a middle class or a competent workforce in the long run if foreign investors segregate locals from managerial and administrative positions.

Requiring foreign firms to employ 75% of locals within six years is an ambitious target and cannot be achieved without significant educational reforms and incentives to motivate foreign firms to enter a market where they are required to train a low-skilled workforce, whilst providing equal pay for local and foreign staff in similar positions.

The initial tax relief of up to 50% of profits from exports and a tax exemption for companies that reinvest in their businesses within one year is a notable start. The government, however, should extend rewards for foreign companies that take on the additional burden of training locals through intensive apprenticeships, equivalent to vocational schooling, and promote distinguished local employees.

Tax breaks, export subsidies, dividends, import tax waivers and other methods can be extended and/or adopted to compensate businesses that share technical know-how in order to contribute to upgrading local human capital.

Fourth, President Barack Obama's historic visit to Myanmar this month is a unique opportunity for the United States to pressure the Myanmar government into accelerating comprehensive educational reforms. Neglected by the Myanmar government, educational institutions receive a bleak 1% of the government expenditures and have been chronically starved of funds.

Illiteracy rates are far above officially reported numbers. Only 85% of children attend primary school; only 60% of those students are able to continue on to middle school because of burdensome school fees. Additionally, universities have been pushed to the outskirts of major cities and their quality has declined substantially in the previous two decades from a lack of state funding. Unsurprisingly, the only pathway for upward mobility in Myanmar has been through the ranks of the military or emigration.
This declining trend in quality of education has to be reversed. Educational reform will be decisive in reversing Myanmar's chronically plagued low-skilled workforce and in meeting the demands of foreign investors. Importantly, Western governments can encourage this transformation through diplomatic pressure to increase educational spending along with the creation of select educational programs that target rural schools.

Moreover, launching Fulbright and other scholarship initiatives for deprived, but distinguished, students to pursue their studies at universities abroad in select academic fields can help meet Myanmar's immediate developmental needs (engineering, medicine, biochemistry, agronomy, and computer science).

Manufacturing investors tend to make their decisions based on comparative advantage, and Myanmar's nascent financial sector, uncertain business environment, tangled tax regime and dilapidated infrastructure does not bode well for prospective investors, irrespective of lifted sanctions and advantageous investment laws.

Nevertheless, some responsible investors will still be willing to take the plunge, and manufacturing offers the path of least resistance in eroding the nepotism that has characterized the oligarch-led Myanmar economy and facilitating a bottom-up socioeconomic transformation.

George Gorman is an East Asia and Pacific affairs consultant based in Washington DC and specialist in Southeast Asian international affairs. He can be reached at George.gorman@american.edu.

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing. Articles submitted for this section allow our readers to express their opinions and do not necessarily meet the same editorial standards of Asia Times Online's regular contributors.

(Copyright 2012 George Gorman.)


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